News: The Straits Times - 8 October 2012
Regulating tightly 'not always feasible'
by Elgin Toh
THE desire to regulate banks more tightly in the aftermath of the global financial crisis is understandable but not always practicable, Prime Minister Lee Hsien Loong said last night.
The pressure in the West to separate commercial banking from investment banking, for example, might in reality be impossible, he argued. The latter is "intrinsic to the financial system", he said.
In his response to a question on bank regulation at a dialogue session with Kiwi businessmen last night, Mr Lee weighed in on a debate raging in developed nations, especially ones where taxpayers' money have been used to bail out banks, to the outrage of many.
One argument is that a wall should be built between the safer commercial banking functions - that mainly involve taking deposits and giving out loans - and the more risky sort that hedge funds and investment banks engage in - which Mr Lee said sometimes amounted to "gambling".
The viability of commercial banks is then effectively guaranteed by the government to prevent any possible meltdown of the whole financial system. The latter, however, must be allowed to fail if they make the wrong bets.
Mr Lee expressed his scepticism with this argument yesterday, pointing out that "financial markets have variegated into all kinds of sophisticated activities, products, derivatives, investment activities, trading - and the (commercial banks) are also in these".
"It's very hard to draw a line," he said.
Furthermore, "if all the banks threaten to die at the same time, governments cannot help but go and rescue them", as they did in 2008 and 2009.
The Singapore Government's approach was therefore to accept that mishaps were in the nature of the capitalist system, and to build up the nation's reserves instead, in anticipation of such events.
In the 2008 crisis, said Mr Lee, Singapore could do the "right thing" and protect jobs by helping employers with Central Provident Fund payments because the reserves were there. Singapore was also fortunate that the storm passed relatively quickly, he said.
"Next time, better make sure we have got ammunition and powder dry, ready for a crisis."